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Tuesday, April 30, 2013

[Postedit 27 May 2013: For final summing up of these issues, see post Reinhart-Rogoff vs. New Zealand: Final Round?][Note: You need to read the two previous posts 1,2, to understand this one!]The discrepancies between the RR data for New Zealand real GDP growth rates and any published sources have been bugging me since yesterday morning's post. So I retrieved the original RR data from the UMaas site and inserted them into my Excel spreadsheet (yes, I'm also in bed with the devil here).In turns out I had misread HAP's description of the four missing observations for NZ. They're 1946-1949, not 1947-1950 as I had assumed. RR do not count 1950 in the over 90% category since the NZ debt ratio dipped below 88% that year. If they had, again the result would have been reversed, since that Korean War boom value of +14.67% creeps back in. Thus we have to shift the missing RR data to make a meaningful comparison with the growth values from Maddison/Statistics New Zealand.I have now done so in this table, where the fourth column now contains the original RR values, 1950 is highlighted in yellow to emphasize that it is not counted, I added 1952 for additional evidence, and the averages are only taken for the relevant range 1946-49 + 1951:

Year

Maddison

Maddison Geary-Khamis $90

Stat NZ $91/92

RR

1946

8.70

3.37

2.95

7.71

1947

10.91

9.56

0.42

11.93

1948

-9.92

-11.69

3.17

-9.92

1949

10.79

8.54

-5.00

10.79

1950

14.67

12.38

4.97

14.68

1951

-7.63

-9.49

15.60

-7.64

1952

4.34

1.83

-5.50

4.35

average 1946-49+1951

2.57

0.06

3.43

2.57

It's now apparent that the source of RR's growth data is Maddison. (In fact, RR state this explicitly on their data website without providing the data they used directly, so I trust that the UMaas spreadsheet has reproduced this correctly. I'm getting my Maddison values from Statistics New Zealand.) However, even now there are some strange discrepancies. The growth rate for 1946 is 1% too low, that for 1947 1% too high (highlighted in orange). [Postedit as of May 4, 2012: This discrepancy only exists for 1946 & 1947 growth rates calculated from real GDP Maddison data provided by Statistics NZ. The RR values do correspond to the growth rates derived from Maddison's original database. I have no idea why StatisticsNZ provides different "Maddison" values and whether they represent a transcription error on their part or a data revision.] Otherwise, up to slight rounding discrepancies, they are identical. The Stat NZ series looks lagged by one year, but that still does not fully explain the remaining large discrepancies.

Nevertheless, the conclusions of yesterday's post remain. If one takes the Statistics NZ value for 1951 (or include RR's 1950 value), RR's result is stood on its head: highly indebted countries grow faster!

Any result that is so critically sensitive to the inclusion or exclusion of a few observations or a slight time shift between them that decides whether you're in the war boom or the waterfront strike, cannot be taken seriously.

However, at least we can now wake up, if somewhat groggily, from one postmodern data nightmare. Only 999 more to go...

[Post-Editing Note: You need to read the last post on the centrality of 1951 New Zealand to the Reinhart-Rogoff result to understand the motivation for this post.]

I've calculated New Zealand real GDP growth rates for the period 1946-1951 based on three data series available from Statistics New Zealand, using the dating convention

growth rate (t) = 100*(GDP(t) - GDP(t-1))/GDP(t-1).

New Zealand Real GDP Growth Rates in %, Three Methods

Year

Maddison

Maddison Geary-Khamis $90

Stat NZ $91/92

1947

10.91

9.56

0.42

1948

-9.92

-11.69

3.17

1949

10.79

8.54

-5.00

1950

14.67

12.38

4.97

1951

-7.63

-9.49

15.60

average

3.76

1.86

3.83

None of these series corresponds to the data employed by Reinhart and Rogoff, although the Maddison data comes closest. [Postedit: see next post for partial data reconciliation!] Moreover, the three series are wildly inconsistent, even the two Maddison series, although the Maddison series at least fluctuate in step with one another. The Statistics NZ series seems to lag the other two by one year but still deviates significantly from them (the 1952 growth rate is -5.5%).

If RR had used the Statistics NZ value of +15,60% for 1951 instead of the -7.6% one they did use, they would have obtained the exact opposite conclusion - that countries with debt ratios over 90% had significantly higher growth rates than lower indebted countries! That is the danger one runs by basing such a far-reaching conclusion on just one observation of the most minor country in the database. In any event, the gyrations in NZ's postwar growth experience had nothing whatsoever to do with its indebtedness but were rather driven by unprecedented industrial disputes and the Korean War wool export boom.

Now some nitty-gritty on the 1951 NZ waterfront lockout/strike.

The waterfront dispute did not entirely close the ports. After locking out the waterside union workers, the government declared a state of emergency and used military troops to reestablish some measure of port activity (as well as in the coal mines).

While it was the longest NZ industrial dispute, it was not the most violent one. That was the Great Strike of 1913.

Support strikes were staged by coal miners, railroad and hydroelectric workers, frozen meat processors and in other sectors amounting to some 22,000 workers during much of the 151 day dispute.

The government ultimately achieved its primary goal in provoking the dispute - the destruction of the waterside union, which had separated from the main labor federation, by branding them communists and blacklisting their leadership and activists.

Sunday, April 28, 2013

The 1951 New Zealand waterfront strike closed the country's ports for 151 days and dealt the most serious blow to Reinhart and Rogoff's 2010 growth calculations.

Most of the discussion of the Reinhart-Rogoff 2010 debt paper since the publication of the Herndon, Ash and Pollin's critique has focused on the Excel coding error that inadvertently deleted the first five countries in the sample. (On the whole irrelevance of the study for establishing a purported 90% debt cliff, see my previous post.) While this struck many as the most egregious instance of data shoddiness in their study, it's impact on the discrepancy HAP found for mean growth rates for debt over 90% was in fact negligible.What's really driving the 2.3% discrepancy, all of 2%, in the mean growth rate of the most highly indebted countries, is RR's treatment of the five New Zealand observations in this debt category in the period 1946-1951 (see HAP p. 10). Thus RR (cherry)picked only the 1951 value, -7.6%, leaving out the other four: 7.7%, 11.9%, -9.9%, and 10.8%, thereby lowering NZ's average growth rate when its debt was over 90% from 2.6% to -7.6%. Since average country growth rates are weighted equally in RR's scheme (as opposed to weighting each country-year observation equally, as HAP propose), this one observation is weighted as much as, for example, the 19 years of British over-90% indebtedness.One can accuse RR of cheery picking and using biased (or at least debatable and not highlighted) weighting schemes in their study or not, as one wishes. But another aspect of the New Zealand story seems to have escaped attention.

In 1951 New Zealand was in the midst of an export boom caused by the outbreak of the Korean War (the 1950 growth rate of +10.8% is already an impressive indicator of this).So why does growth collapse in 1951 to -7.6%?Simple. The economy had been paralyzed by the 151 day waterfront dispute that closed down the ports and that was the longest and most violent instance of industrial unrest in New Zealand's history (a country then as now with a very high trade dependence). No wonder the growth rate tanked. It had nothing to do with NZ's indebtedness and in fact was an exception in an otherwise booming era. (See here and here for historical background. Thanks to littlegreyrabbit for raising this issue at Retractionwatch.)In their by now numerous but ambivalent mea culpas, RR appeal for understanding in view of the difficulties of recreating historical data. But why this is an excuse for the lacunae in their use of the panel data (the 2010 paper gives no indications of these gaps or the reasons for choosing some available years and not others) is never made clear.But their failure to inquire deeper into why the New Zealand growth data show such an erratic pattern that had nothing whatsoever to do with the country's indebtedness seems to be symptomatic of many econometric studies that cavalierly gloss over the nitty-gritty of the historical record. Since so much of their 2010 result hinges on this one observation, the lack of such an inquiry seems all the more inexcusable in economists with such an expressed concern with that historical record.Moral of the story: When you mess with New Zealand data, one strike and you're out!PS: For some real historical nitty-gritty on the 1951 NZ waterfront lockout/strike, watch this superb labor history video.

Thursday, April 25, 2013

In the justified hullabaloo about Herndon, Ash and Pollin's (HAP) demolition of Reinhart and Rogoff's (RR) AER P&P and NBER/JEP "Growth in Time of Debt," it hasn't been remarked that even if RR had made none of the absurd and elementary errors that they have now been shown (wittingly or unwittingly) to be guilty of, their main result - that there is a "debt cliff" at 90% - is statistical nonsense.

RR employed a very crude statistical technique for analyzing their observations of country pairs of debt ratios and growth rates - they binned them into just four categories of debt (0-30%, 30-60%, 60-90%, and 90% to infinity) and then computed growth rate averages for each bin (also using a very idiosyncratic weighting procedure, as HAP show, besides leaving out important data points). Notice that the size and number of bins is arbitrary. They could have used 100%, 150% or even 200% as their upper bin boundary, and 5, 10 or 20 bins to determine resolution. The upper bin boundary at 90% is taken completely out of a hat.

Thus, even if their result had been correctly calculated (which it wasn't), their erroneous finding that the mean growth rate for debt levels greater or equal to 90% was almost 3% lower than for debt below this level (in fact, it is only about 1% lower by HAP's reckoning), would be consistent with

a smooth and slowly varying relationship between debt and growth (with the direction of causality still undetermined), i.e., no debt cliff or edge of world at all, and thus no dragons;

a debt cliff of undetermined sharpness starting anywhere above 90%, e.g. at 200% (there are many observations with such extreme values in their dataset which could be dragging down the mean in their 90%-infinity category).

HAP have nice figures plotting all the observations and drawing a completely smooth and remarkably slowly varying relationship between debt and growth (and additionally demonstrating how much variance there is in the dataset):

Thursday, April 18, 2013

He argues that by introducing Abenomics now instead of waiting for the German Federal elections in September, Japan is indulging in beggar-thy-neighbor bad behavior (since the Eurozone/ECB cannot react with fiscal and quantitative easing - German official monetary conservatism is tying their hands). However, if it waited until just before the elections, it would be a good international partner and not taking advantage of European ideological paralysis. The Eurozone would finally have an excuse (as if they didn't already have one) to promote growth and not have to kowtow to hypocritical German electoral sensitivities.

Why does waiting 6 months make Japan a good partner, and acting now is beggar-thy-neighbor? If stimulating growth and ending deflation would be a good thing in 6 months and the IMF & Co have been urging it on Japan for the last 20 years, why isn't it even a better thing to do now?

If the world has to wait for the German electoral cycle to play out, it is condemning itself to paralysis, since Germany has critical Länder and Bund elections every few months. Remember the first Greek bailout, which Merkel delayed (on a "those lazy Greeks who retire earlier than we do" platform) until after the elections in North Rhine-Westphalia (which her party still lost, and then she did the about-face on Greece everyone knew she would do)?

Waiting for the Germans is like waiting for Godot.

I say, screw the German electoral cycle and let's get on with the job of saving the world economy (which is ultimately even in Germany's own interest - when I last checked it was still living on Planet Earth and not preparing to run a trade surplus with Mars).

Wednesday, April 17, 2013

The 'Creditanstalt' Proudly Announces the Creation of the Titanic Memorial Prize for Incorrigible Piloting of Unsinkable Ships in Treacherous Waters

RMS Titanic living up to her unsinkable reputation in 1912.

Capt. Edward Smith, imperturbable commander of the Titanic and exemplary role model for current European leaders

Inspired by the op-ed in today's New York Times Europe Is Responding, co-authored by JEROEN DIJSSELBLOEM, OLLI REHN, JÖRG ASMUSSEN, KLAUS REGLING and WERNER HOYER, the 'Creditanstalt' has decided to create a third Memorial Prize named after that incomparable paragon of European engineering, the RMS Titanic. The recipient of the Titanic Prize will be awarded One Million 'Euros'in European Investment Bank grants.

The five authors of this convincing piece have been jointing and individually nominated for the prize by the Awards Committee. (Dijsselbloem and Rehn have already been nominated for the Brüning and Mellon Memorial Prizes, where they are in serious contention, as readers can see from the ongoing poll results on the sidebar.) Additional nominations will be accepted by the Committee until April 30 by submitting comments to this post.

Some inspiring excerpts from their rousing clarion call:

"But in the eye of the storm, we strengthened the foundations of our currency and improved the sustainability of our economies."

"This response to the crisis has delivered results. Countries under assistance are improving their fiscal situation and regaining competitiveness."

"Europe has responded to adversity by moving closer together and deepening integration. As a result of our determination and our common strategy, a difficult but necessary adjustment is taking place, from which a stronger euro zone is set to emerge."

Thus fiscal icebergs have been skirted and watertight contagion compartments are battened down. What do a little icy unemployment and recession choppiness matter to the Eurocrats and bankers in first class? The lookout is agreeably delusional in his crow's nest. The captain has gone to bed early after penning an op-ed for the New York Times and issuing the order of the day:

Sunday, April 14, 2013

After selecting your candidates for the Brüning and Mellon Memorial Prizes (see boxes on the right sidebar), be absolutely sure to press the Vote buttons on the bottom of the polls. Otherwise your vote will not be tallied.

If you think you might have forgotten to press the Vote buttons after voting, just go back and vote again. The software will prevent your votes from being tallied twice.We don't want any more elections falsified by "hanging chads"!

Friday, April 12, 2013

Monkeys in contemporary 17th century Dutch dress are shown dealing in tulips. A satirical commentary on speculators during the time of "Tulip Mania", an economic bubble that centered around rare tulip bulbs. At left, one monkey points to flowering tulips while another holds up a tulip and a moneybag. Bulbs are weighed, money is counted, a lavish business dinner is enjoyed. The monkey at left has a list of rare tulips, his sword denotes upper class status. Farther back, a monkey sits like a nobleman astride a horse. One in mid-foreground draws up a bill of sale; the owl on his shoulder symbolizes foolishness and ignobility. Brueghel is not only ridiculing tulip speculators as brainless monkeys, the work is an object lesson for the folly of speculating to such an extent in such a transient thing as a mere bloom. In the denouement at right, a monkey urinates on the now worthless tulips; fellow speculators in debt are brought before the magistrate or weep in the dock. A frustrated buyer brandishes his fists, while at the back right a speculator is carried to his grave. [Source: Wikipedia article "Tulip Mania"]

Tuesday, April 9, 2013

Due to the inadequacy of the Blogger/Google Poll gadget the 'Creditanstalt' Brüning and Mellon Memorial Awards Committee has decided to reopen the polls and extend the deadline until May 5, 12:00 (UTC+1, Vienna time).

If you voted before April 9, 16:15, please recast your vote using the new Polldaddy.com polling gadgets on the right-hand sidebar!The order of the candidates is randomized at each webpage viewing to ensure fairness. There is now also a provision for write-in candidates.The Prize Announcement can be found at this post.The Blogger/Google Poll gadgets were not correctly recording the votes and even dropping votes that had already been registered. This is apparently a problem that has been brought to Blogger/Google's attention months ago but which they still have not fixed (sounds like the Cyprus banking crisis).
I thank Blogger blogger DarkUFO for bringing the PollDaddy.com alternative to my attention (see his webpage on inserting PollDaddy code into Blogger.com blogs).Happy voting and let the best policymaker win!

Annette Funicello died yesterday, a sad day indeed for us remaining survivors of the baby boom. With tears in our eyes we recall those far-away halcyon days of innocence when real wages rose in lock-step with productivity, top marginal tax rates were over 70%, unions effectively protected workers rights, income inequality was at an all-time low, the boring banks were less than 4% of GDP, and the superpowers were free to test multi-megaton H-bombs in the atmosphere (even Charles Murray chokes up here).

And then along came Margaret Who (and somebody named Ronald R., can anyone remember?). After something called the Vietnam War, modest current account deficits and the breakup of Bretton Woods, inflation and the oil crises...

Those were the days. By the way, does anybody want to buy a Davy Crockett coon-skin cap?

About Me

I'm a research economist at UNU-MERIT (Maastricht, The Netherlands) and IIASA (Laxenburg, Austria) with a specialization in the economics of innovation, complex dynamics, economic growth and evolutionary economics. By the 2008 world crisis at the latest it became clear that macroeconomics, financial markets and economic policy cannot be entrusted anymore to mainstream economists. Hence this blog.